Corporations

Question 1

What is a corporation?

Answer 1

Legal entity distinct from its owners and may be created only by filing certain documents with the state

Question 2

Limited liability for owners, directors, and officers

Answer 2

Owners (shareholder), officers, directors: generally not personally liable for obligations of corp
Generally: only the corp itself liable for corp obligations
Owners only risk their investment (shares)

Question 3

Centralized management

Answer 3

General: right to manage corp is not spread out among shareholders

Centralized in board of directors who delegate day-to-day management to officers

Question 4

Free transferability of ownership

Answer 4

Generally, ownership of corp freely transferable

Question 5

Continuity of life

Answer 5

Corporation may exist permanently; generally not affected by ownership changes

Question 6

Taxation

Answer 6

C corp: corp taxed distinctly from owners. Double taxation - corp profits taxed, then shareholder distribution taxed.

S corp: certain corps elect to be taxed like partnership but still are a corp. Limitations of taking advantage of this structure: less than 100 stockholders, generally shareholders must be individuals, only one class of stock

Question 7

Sole proprietorship

Answer 7

one person owns all assets of business; no business entity distinct from owner; owner personally liable for business’s obligations; business entity cannot continue beyond owner’s life. profits and losses transferable, profits and losses to owner

Question 8

Partnership

Answer 8

Similar to sole proprietorship except at least two owners for a partnership. Little formality required to form a partnership. Partnership generally not treated separately from business, personally liable for obligations of partnerships, management rights spread among partners. Ownership cannot be transferred without consent of partners, usually does not continue beyond life of owners, profits and losses directly to partners unless election to be taxed as corp

Question 9

Limited partnership (LP)

Answer 9

Partnership with limited liability for limited partners, but otherwise similar to partnerships. Formed with compliance with LP statute. At least one general partner, who has full personal liability for partnership and most management rights

Question 10

Limited Liability Company (LLC)

Answer 10

limited liability of corp and the flow through tax advantages of the partnership. File proper docs with state. Flexibility of ownership - centralized and owner management, free transferability of ownership

Question 11

Benefit corporation (B corp)_

Answer 11

intends to benefit public and environment, in addition to shareholders. Treated same as C corp for taxes. Articles must say it is to be treated as a B corp. Same liability and duties of corp, but also required to consider actions impact on employees, customers, communities, environment. Must have annual benefit report filed with shareholders, online and / or with secretary of state

Question 12

Formation and Status of Corp

Answer 12

Created under statute
Formation terminology
De jure corporation
Existence at filing - filing with secretary of state
Bylaws

Question 13

Formation and status: statutory creation

Answer 13

Complying with state corporate law, based on Revised Model Business Corporation Act

Question 14

Formation and status: formation terminology

Answer 14

formed in accordance with law: de jure corp

De facto can be found if de jure not there, or by estoppel

Question 15

Formation and status: de jure corporation

Answer 15

Conform with applicable statutory requirements

incorporators file articles of incorp with secretary of state
Articles must contain:
name of corp (name must have Corporation, Company, Incorporated, or Limited in name)
number of shares corp authorized to issue
name and address of corp registered agent
name and address of each incorporator

Sometimes contain: statement of business purpose (generally presumed to be formed to conduct any lawful business)

Question 16

Ultra vires actions and business purpose

Answer 16

Narrow business purpose - may not undertake activities unrelated to achieving that purpose. Acts beyond scope are ultra vires. Ultra vires acts are void and unenforceable at common law, but RMBCA generally enforceable. Raise through these ways
Shareholder: sue corp to enjoin ultra vires act
Corp: may sue officer or director for damages for approving ultra vires act
State: bring action to dissolve corp for committing ultra vires act

Question 17

Organizational meeting and bylaws

Answer 17

Corp has organizational meeting to elect directors, appoint officers, and adopt bylaws. Bylaws: any provision for managing corp that is not inconsistent with articles or law. Adopted by directors; modified or repealed by majority vote of either directors or shareholders

Question 18

Defective formation: de facto corporation

Answer 18

All same rights as de jure, but subject to direct attack in quo warranto proceedings by state
Requirements:
Statute under which it could be validly incorporated
Colorable compliance with statute and good faith attempt to comply
Conduct of business in the corporate name and the exercise of corporate privileges

note: RMBCA - persons who purport to act behalf of corp knowing no incorp are jointly and severally liable for all liability for so acting

Question 19

Defective formation: corporation by estoppel

Answer 19

persons who have dealt with entity as if a corp will be estopped from denying the corp’s existence. Prevents from leaving corporate contracts; does not apply to torts.

Question 20

Application of de facto corporation and corporation by estoppel doctrines

Answer 20

De facto: treated like any other corp except state may seek dissolution (quo warranto), applies for both contracts and torts
Estoppel: applies only in contract cases, not tort cases

If all fails: courts will only hold active business members personally liable (joint and several)

Question 21

Piercing corporate veil

Answer 21

Three situations where it will happen (usually in closely held corporations, but not always):
Ignoring corporate formalities
Inadequate capitalization at time of formation
Fraud, avoidance of existing obligations, evasion of statutory provisions

Question 22

Piercing corporate veil: ignoring corporate formalities

Answer 22

Effectively the “alter ego” or “mere instrumentality” of shareholders or another corporation, and some basic injustice results, may pierce

Exs. treat corporate assets as own, fail to observe corporate formalities

Question 23

Piercing corporate veil: inadequate capitalization at time of formation

Answer 23

corporation inadequately capitalized such that at time of formation, not enough unencumbered capital to reasonably cover prospective liabilities

Question 24

Piercing corporate veil: fraud, avoidance of existing obligations, evasion of statutory provisions

Answer 24

pierce when necessary to prevent the crimes there

Note: adopting form to avoid future liability not itself reason to pierce

Question 25

Liability when piercing corporate veil

Answer 25

Shareholders who are active in the operation of the business jointly and severally liable

Easily pierced in tort cases, less so in contract (parties could investigate corp itself)

Insolvency: claims of shareholder creditor may be subordinated to outside creditor’s claims if equity so requires

Question 26

Debt securities

Answer 26

Borrowed funds from outside investors and promises to repay - no ownership interest in corp

Secured debt obligation: bond
Unsecured debt obligation: debenture
Payable to the holder: bearer or coupon bond
Payable to owner registered on corporation records: registered bond

Question 27

Equity securities

Answer 27

Shares - holders have ownership interest

From articles: authorized shares
Authorized, sold: issued and outstanding
Reacquired by corp through repurchase, redemption: authorized but unissued (formerly authorized, issued, but not outstanding treasury shares)

Question 28

Share classifications

Answer 28

Common shares: each shareholder has an equal ownership right

Classes or series within class: varied right if in articles

Question 29

Classes and series of stock description in articles

Answer 29

Articles must:
Prescribe number of shares for each class
Prescribe a distinguishing designation for each class (i.e. Class A preferred)
Either describe the rights, preferences, and limitations of each class or provide that the rights shall be determined by the board prior to issuance

Question 30

Share options

Answer 30

right to purchase shares in the future under terms predetermined by the board of directors. May be offered in exchange for any consideration, including services

Question 31

Stock subscription

Answer 31

Promises from subscribers to buy stock in corp

Preincorporation stock: stock irrevocable for six months unless otherwise provided in terms of subscription agreement or all subscribers consent to revocation

Payment: unless otherwise provided, payment upon demand by board. Demand not in discriminatory manner. Failure to pay may be penalized by sale of the shares or forfeiture of subscriptions and any payments paid, at corporations option

Question 32

Consideration for shares

Answer 32

RMBCA: any tangible or intangible property or benefit to corporation

Amount
Traditionally: stock cannot be issued for less than par value. Held in certain account containing at least aggregate par value of outstanding par value shares.
RMBCA: any consideration directors deem appropriate; consideration need not be in any specific account; consideration other than cash - stock considered fully paid and nonassessable as soon as consideration received

Stock issued for less than par value: “water”
share will be validly issued, but directors on hook for breach if they knowingly authorized issuance. Buyer will be liable for the stock value. Third party transferee: only if taking in good faith - did not know about water

Question 33

Promoters and their relationship between each other

Answer 33

Job: procure capital and other commitments that will be used after formation

Relationship between promoters: joint venturers who have fiduciary relationship with each other - breach duty if pursue personal gain at the expense of fellow promoters

Question 34

Promoters and their relationship to the corporation

Answer 34

Fair disclosure and good faith

Breach of fiduciary duty arising from sales to corp: profits by selling property to corp may be liable unless all material facts disclosed. Disclosed and independent board approved, not liable for profits. Board not completely independent - still ok if they knew of transaction at time of subscription or unanimously ratified after full disclosure. Purchase of all stock and sales to outsiders not liable for profits to corp.

May always be liable for fraud if P can show they were damaged by promoters’ fraudulent misrepresentations or failure to disclose all material facts

Question 35

Promoters and their relationship to third parties

Answer 35

RMBCA: act on behalf of corp knowing it doesn’t exist - jointly and severally liable for obligations. Liability continues after formation even if corp adopts contract and benefits from it. Promoter released from liability only with express or implied novation (agreement among three parties to release promoter and substitute corp)

Exception: agreement expressly relieves promoter of liability
if contract relieves promoter of liability, THERE IS NO CONTRACT - no one is bound by the contract; it is instead a revocable offer to proposed corporation

Right to reimbursement: promoter personally liable - may be able to gain reimbursement from corp to extent of any benefits received by corp

Question 36

Corporation and their relationship to third parties regarding promoters

Answer 36

Corporate entity does not exist at time of contract, so it is not bound on the promoter’s contract. Corporation bound by either expressly or impliedly adopting the promoter’s contract

Question 37

Shareholder control over management

Answer 37

Generally: no direct control in management; directors have that power

RMBCA: allows shareholders to enter into agreement to dispense with board and vest management power in shareholders. If no such provision in articles, shareholders only have indirect control for voting, when the elect and remove directors, fundamental changes in corporate structure, and modifying bylaws

Question 38

Convening a shareholder meeting

Answer 38

Annual meeting: must be held. if not done within 6 months after end of fiscal year or 15 months after last meeting, court may order meeting to be held

Special meeting: called by board, holders of 1/10 or more of all shares entitled to be cast, or others authorized to do so in bylaws

Question 39

Location of shareholder meeting

Answer 39

within or outside state

Question 40

Notice for shareholder meeting

Answer 40

must be notified not less than 10 or more than 60 days before the meeting. State time, date, and place, and for special meetings, the purpose.

Notice waived by writing or attendance

Question 41

Eligibility to vote at the shareholder meeting

Answer 41

shareholder of record on record date may vote. Record date fixed by board, and may not be 70 days before the meeting. If no record date - day notice is mailed

Question 42

Proxies at shareholder meeting

Answer 42

Duration: 11 months unless provided otherwise. Generally revocable; revoked through shareholder attending and voting himself or subsequent appointment of another proxy

Irrevocable proxy: stated it is irrevocable and coupled with interest given as security

Question 43

Statutory proxy control for shareholder meeting

Answer 43

Rules provide that
there must be a full and fair disclosure of all material facts with regard to management-submitted proposal upon which they vote;
material misstatements, omissions, and fraud in connection with solicitation prohibited;
management must include certain shareholder proposals on issues other than election of directors, and allow proponents to explain position

Question 44

Quorum requirement, voting requirement for shareholder meeting

Answer 44

Usually a majority of outstanding shares entitled to vote, unless more needed by articles or bylaws. Less than quorum present can adjourn the meeting

Vote: generally one share one vote
quorum present - just need a simple majority of shares, unless required more in articles or bylaws

Question 45

Director elections

Answer 45

Unless required otherwise in articles, plurality of votes cast

Cumulative voting: each shareholder entitled to number of votes = number of voting shares * number of directors to be elected

Question 46

Class voting for article amendments

Answer 46

amendment to articles only affects particular class of stock: that class has a right to vote on the action even if the class otherwise does not have voting rights

Question 47

When shareholders can act without meeting

Answer 47

Unanimous written consent of all shareholders to vote on the action

Question 48

Voting trust

Answer 48

written agreement of shareholders under which all the shares owned by the parties of the agreement are transferred to a trustee who votes the shares and distributes the dividends in accordance with the provisions of the voting trust agreement

Not valid for more than 10 years unless it is extended by agreement of the parties

Copy of trust agreement and names and addresses of the beneficial owners must be given to the corp

Question 49

Voting agreement

Answer 49

written and signed agreement providing for the manner in which they will vote their shares Unless agreement provided otherwise, it will be specifically enforceable. Need not be filed with corp and not subject to any time limit

Question 50

Shareholder Management Agreement

Answer 50

shareholders may enter into agreements among themselves about almost any aspect of exercise of corporate power (agreement: eliminating board, establishing officers and directors, requiring distributions under certain conditions)

Agreement must be set forth in articles, bylaws, or a written agreement approved by all persons who are shareholders at the time of adoption. Valid for 10 years unless provided for otherwise; terminated if trading on national securities exchange or traded on national securities market

Question 51

Restrictions on Transfer of Stock

Answer 51

restrictions must be reasonable (i.e. right of first refusal)

Third party purchaser bound if
restriction’s existence conspicuously noted on certificate (or contained in information statement required for uncertificated shares) OR
third party had knowledge at time of purchase

Question 52

Shareholders inspection rights: qualified rights

Answer 52

Qualified rights: may inspect books, papers, accounting records, shareholder records, upon 5 days written notice stating a proper purpose (reasonably related to the person’s interest as a shareholder)

Some sort of agent can be sent to see it (i.e. attorney, accountant)

Question 53

Shareholder inspection rights: unqualified rights

Answer 53

Any shareholder may inspect these regardless of purpose

corporation’s articles and bylaws
board resolutions regarding classification of shares
minutes of shareholders’ meetings over the past three years
communications sent by the corporation to shareholders over the past three years
list of the names and business addresses of current directors and officers
copy of corps most recent annual report

Question 54

Preemptive rights

Answer 54

RMBCA: do not have right to purchase newly issued shares in order to maintain proportional ownership unless in articles

Articles provide it, still do not have a right if shares issued:
for consideration other than cash
within six months after incorporation
without voting rights but have a distribution preference

Question 55

Direct action shareholder suit

Answer 55

May be brought for a breach of fiduciary duty owed to the shareholder by an officer or director. Recovery benefits shareholder

To distinguish right to corp v. rights to shareholder:
who suffers the most immediate and direct damage
To whom did defendant’s duty run

Question 56

Derivative action shareholder suit

Answer 56

Shareholder asserting corporation’s rights rather than own. Recovery generally goes to corporation. Corp is named as defendant.

Standing: shareholder must have been a shareholder at the time of the act or omission complained of or must have become one by operation of law from someone who was a shareholder at that time. Fairly and adequately represent the rights of the corporation.

Demand: written demand of the corporation to take suitable action. Derivative proceeding not less than 90 days unless - shareholder had earlier notification that corporation has rejected demand or irreparable injury to corp would result from 90 day wait

Question 57

Derivative action dismissed if found not in corp’s best interest

Answer 57

if majority of disinterested directors find in good faith after reasonable inquiry that the suit is not in corp’s best interest, but shareholder brings suit, corp can move for dismissal

Burden of proof (shareholder): burden of proving that decision was not made in good faith after reasonable inquiry. If majority of directors had personal interest in controversy, corp has burden to show decision made in good faith

Question 58

Requirement for settling or discontinuance of derivative action

Answer 58

court approval

Question 59

Payment of expenses for derivative action

Answer 59

Court may order corp to pay reasonable expenses if court found action resulted in substantial benefit to corp.

Act commenced or maintained without reasonable cause or improper purpose, may order P to pay reasonable expenses of the defendant

Question 60

Types of distributions

Answer 60

dividends, redemptions of shares, repurchase of shares, distribution of assets upon liquidation

Question 61

Rights to distributions

Answer 61

at least one class must have a right to receive corp net assets on dissolution, after that, distributions are discretionary

Question 62

Declaration generally solely within board’s discretion

Answer 62

Even if articles authorize distributions, it is within board’s discretion to declare a distribution, subject to shareholder agreement or the articles. Shareholders have no general right to compel distribution

Question 63

Limitations on distributions

Answer 63

Solvency requirements
Restrictions in articles
Share dividends

Question 64

Limitations on distributions: solvency requirements

Answer 64

distribution not permitted if either:
corporation would not be able to pay debts when due in usual course of business or
corporations total assets would be less than total liabilities

Question 65

Limitations on distributions: restrictions in the articles

Answer 65

Articles may restrict board’s right to declare dividends

Question 66

Limitations on distributions: share dividends

Answer 66

distributions of corp's own shares to its shareholders are excluded from distribution definition. Above restrictions inapplicable. Shares of one class or series may not be issued as a share dividend in respect of shares of another class unless:
articles so authorize
majority of the votes entitled to be cast by the class or series to be issued approves the issue
there are no outstanding shares of the class or series to be issued

Question 67

Contractual rights in regard to distributions

Answer 67

Limitations and preferences

Rights after declaration

Question 68

Contractual rights in regard to distributions: limitations and preferences

Answer 68

shares may be divided into classes with varying rights
Common preference terms: preferred shares have a right to receive dividends before common shareholders.

Right to preferred dividend may or may not be cumulative if unpaid in particular year (cumulative v. noncumulative) or accumulate only if sufficient current earnings (cumulative if earned).

No right by preferred shares to share in distributions made on common shares unless preferred shares provide they are participating

Question 69

Contractual rights in regard to distributions: rights after declaration - same as general creditor

Answer 69

Once distribution lawfully declared, shareholders generally treated as creditors of corporation; claim on same level of other unsecured creditors.

Can be enjoined or revoked if declared in violation of solvency limitations, articles, or a superior preference right

Question 70

Who may receive dividends

Answer 70

shareholder of record on record date

Question 71

Liability for unlawful distributions

Answer 71

Director who votes for or assents to it: amount of the distribution that exceeds what could have been properly distributed

not liable for distributions in good faith:
based on financial statements prepared according to reasonable accounting practices, or on a fair valuation or other method that is reasonable under circumstances
by relying on information from officers, employees, legal counsel, accountants, etc or a committee of the board to which director is not a member

Question 72

Against whom may a director seek contribution for an unlawful distribution?

Answer 72

every other director who could be held liable for the distribution
each shareholder, for the amount accepted while knowing distribution improper

Question 73

Shareholder liability

Answer 73

General rule - no fiduciary duty
Liability pursuant to shareholder agreement
Close corporation - loyalty and utmost good faith that is owed by partners to one another
Duties of controlling shareholders to minority shareholders - refrain from using control to unfairly prejudice minority shareholder

Question 74

Shareholder liability: General rule - no fiduciary duty

Answer 74

Shareholders may act in own personal interest and have no fiduciary duty to corp or fellow stockholders

Generally limited to liabilities for unpaid stock, pierced corporate veil, absence of de facto corporation

Question 75

Shareholder liability: liability pursuant to shareholder agreement

Answer 75

if shareholders enter into agreement that vest some or all rights to manage the corp in one or more shareholders, managing shareholder(s) have liabilities that a director would ordinarily have with respect to that power

Question 76

Shareholder liability: close corporation

Answer 76

Same duty of loyalty and utmost good faith as for partners

Question 77

Shareholder liability: duties of controlling shareholders to minority shareholders

Answer 77

controlling shareholder must refrain from using control to cause corporation to take action that unfairly prejudices minority shareholders; includes duty to disclose all material information

Question 78

Board of directors

Answer 78

responsible for management of the business and affairs of the corporation

Need not be shareholders or residents of particular state

Need only one director. Articles or bylaws may have limitless directors. Elected at each annual shareholder meeting, subject to contrary articles provision. If there are at least 9, can be split into 2 or 3 classes with staggered 1-3 year terms.

Vacancies generally filled by shareholders or directors

Question 79

Removal of directors

Answer 79

may be removed by shareholders with or without cause.

Special case for cumulative voting: cannot be removed if votes cast against removal would be sufficient to elect them if cumulatively voted at an election of directors

Director elected by a voting group of shares can be removed only by that class

Question 80

Directors’ meetings

Answer 80

Notice: (attendance is waiver unless attendance is for sole purpose of protesting lack of notice)
Regular meetings - without notice
Special meetings - two days written notice of the date, time, and place of the meeting

Quorum: majority of the board unless articles or bylaws require more or less
Can be no fewer than 1/3 of board - and directors can break quorum by leaving

Question 81

Approval of director action

Answer 81

if quorum present, resolutions approved by majority of present directors

Any action required to be taken by directors at a formal meeting may be taken by unanimous consent in writing, without a meeting

Question 82

Delegation of directors authority

Answer 82

Unless provided otherwise in articles or bylaws, board may create committees (2+ members) and appoint board members to serve on them

Committees may act for board, but board remains responsible

Board may also delegate authority to officers

Question 83

Directors right to inspect

Answer 83

Have right to inspect corporate books

Question 84

Director duties and liabilities

Answer 84

Personal liability of directors may be limited - may have limit for action or failure to take action. However, cannot eliminate liability for financial benefits to which they are not entitled, intentionally inflicted harm on corp, unlawful distributions, intentional violation of criminal law

Duty of care/ BJR: manage to best of ability. Duties
in good faith, with care that ordinarily prudent person in a like position would exercise under similar circumstances, in a manner that directors reasonably believe to be in the best interests of the corporation

Duty to disclose material corporate information to board members

Duty of loyalty: conflicting interests transactions, corporate opportunity doctrine, competing business, common law insider trading

Question 85

BJR

Answer 85

burden on challenger to show statutory standard not met

Director may rely on information, opinions, reports, or statements if prepared by:
corporate officers or employees reasonably believed to be reliable and competent
legal counsel, accountants, or other persons as to matters believed to be in their professional competence
committee of the board to which director is not a member, if committee merits confidence

Question 86

Duty of Loyalty: conflicting interests transaction

Answer 86

When: director knows they or related person either
is a party to transaction
has a beneficial financial interest in or so closely linked to transaction that interest would reasonably be expected to influence director’s judgment
is a director, general partner, agent, or employee of other entity is transacting and the transaction is of such great importance that it would in the normal course of business be brought before the board

Question 87

Duty of loyalty: standards for upholding conflicting interest transaction

Answer 87

will not be enjoined if:
transaction approved by a majority of the disinterested directors (at least two) after all material facts disclosed to board
approved by a majority of votes entitled to be cast by shareholders without a conflicting interest after all material facts disclosed to shareholders (notice of meeting must describe the conflicting interest transaction)
transaction, judged at time of commitment, was fair to corp

Question 88

Duty of loyalty: special quorum requirements

Answer 88

At a director’s meeting: majority of the directors without conflicting interest, but not less than two

At a shareholder’s meeting: majority of votes entitled to be cast (not including shares owned or controlled by director with conflicting interest)

Question 89

Duty of loyalty: fairness factors for conflicting interest transactions

Answer 89

adequacy of consideration, corporate need to enter into transaction, financial position of corp, available alternatives

Question 90

Remedies for improper conflicting interest transaction

Answer 90

enjoining transaction, setting the transaction aside, damages, similar remedies

Question 91

Director compensation

Answer 91

directors may set own compensation. However, unreasonable compensation breaches fiduciary duties

Question 92

Duty of loyalty: corporate opportunity doctrine

Answer 92

director’s fiduciary duties prohibit them from diverting a business opportunity from corp to self without first giving corp and opportunity to act

Corp must have interest or expectancy - only goes to that length. not to every single business opportunity. Look to closeness to corporation’s line of business

Corp lack of financial ability to take advantage is not a defense

Board must decide whether or not to accept opportunity

Remedies: corp recover profits from transaction, force the corp to convey the opportunity to the corp, for whatever consideration the director purchased the opportunity

Question 93

Duty of loyalty: common law insider trading

Answer 93

director has no common law duty to disclose all facts relevant to a securities transaction between director and other parties to transaction

Exception: knows of special circumstances (planned merger, upcoming extraordinary dividend)

Question 94

Officers: generally

Answer 94

RMBCA does not require corporation to have any specific officers, just that they have officers in bylaws or appointed by directors pursuant to bylaws

Officer may appoint other officers or assistant officers is authorized by bylaws or board.

One person may hold more than one office

Question 95

Officers: duties

Answer 95

ordinary rules of agency determine authority and powers. Actual or apparent authority basis. May bind corp through ratification, adoption, or estoppel if unauthorized.

Question 96

Officers: standard of conduct

Answer 96

carry on duties in good faith, with the care an ordinary prudent person in a like position would exercise under similar circumstances, and in manner they reasonably believe is in best interests of corp

Question 97

Officers: resignation and removal

Answer 97

officer has the power to resign at any time by delivering notice to corp, and corp has the power to remove with or without cause.

If removal is a breach of contract, nonbreaching party may have right to damages, but appointment to office itself does not create contractual right to remain

Question 98

Indemnification of directors, officers, and employees

Answer 98

Mandatory: must for dir or officer who prevailed in defending proceeding against them for reasonable expenses, including attorneys’ fees in connection with proceedings [officers generally indemnified like director]

Discretionary:
director unsuccessfully defending suit brought against director on account of their position if director:
acted in good faith,
believed conduct in best interests of corp (within capacity), not opposed to best interests of the corp (conduct not within director’s official capacity), or not unlawful (criminal proceedings)

Exception: does not have to indemnify when defending
direct or derivative action in which director liable to corp
action charging that director with an improper benefit

Question 99

Indemnification of directors, officers, and employees: who determines

Answer 99

determined by disinterested majority of the board, or if there is no disinterested quorum, majority of disinterested committee or by legal counsel; shareholders may also make determination

Court may also order indemnification

Question 100

Indemnification of directors…: advances

Answer 100

corporation may advance expenses if director furnishes corp a statement that dir believes they met appropriate standard of conduct and will repay advance if found to not have done so

Question 101

Liability insurance and indemnification of directors

Answer 101

corp may purchase insurance to indemnify even if directors or officers would not have been entitled to indemnification

Question 102

Indemnification of agents and employees

Answer 102

RMBCA does not limit power to indemnify, advance, or maintain insurance on agents and employees

Question 103

Fundamental changes in the corporate structure: general procedure

Answer 103

1. board adopts resolution
2. written notice is given to the shareholders
3. the shareholders uphold the changes
4. changes in the form of articles and filed with the state

Question 104

Fundamental changes to corporate structure: amendments to articles

Answer 104

Corporation can amend its articles with any provision that would be lawful in original articles

Housekeeping amendments (deleting names of initial directors) can be made without shareholder approval, but most require approval by shareholders

Question 105

Merger, share exchange, and conversion

Answer 105

Vary little from fundamental changes procedure

Merger: blending one or more corporations into another corporation

Shareholders from surviving corp not required when:
articles of incorp after merger will not differ from before merger
each shareholder of survivor whose shares outstanding before merger have the same number of shares with same preferences, limitations, and rights
voting power of shares issued as result of merger will comprise more than 20% of voting power of the shares of the surviving corp

Short form merger: parent owning 90% of outstanding shares of each class may merge the subsidiary into itself without the approval of the shareholders or directors of the subsidiary

Share exchange: one corporation purchasing all of the outstanding shares of one or more classes or series of another corporation

Only shareholders of corporation whose shares will be acquired in exchange need approve; share exchange is not fundamental corporate change

Conversion: one business entity changing its form to another business entity, such as corporation to LLC

Conversion generally has same procedure as merger

Question 106

Disposition of property outside regular course of business

Answer 106

sale, lease, exchange, or other disposition of all or substantially all (75%) of corp property outside regular course of business

fundamental corp change for corp disposing of property

Generally: take free of obligations; Exception: if it is a disguised merger - treat as de facto merger

Question 107

Dissenting shareholders’ appraisal remedy

Answer 107

Who: corp approves fundamental change; shareholder dissenting

1. shareholder entitled to vote on plan of merger and shareholder of subsidiary in short form merger
2. shareholders of corp whose shares are being acquired in share exchange
3. shareholder who is entitled to vote on disposition of all or substantially all of property

Question 108

Market-Out Exception

Answer 108

appraisal right not available for publicly held corp; or corp with at least 2000 shareholders and the shares of the class have a value of at least $20 million, exclusive of senior execs, directors, shareholders owning 10%+

Question 109

Appraisal procedure

Answer 109

Corp give shareholders notice (action will create rights, notice must state entitled to exercise dissenting rights)

Shareholder must give notice of intent to demand payment - BEFORE VOTE, shareholder sends written notice of intent to demand payment for shares. No voting in favor of proposed action

Corporation must give dissenters notice: action approved, notice within 10 days after approval; include time and place to submit shares

Shareholders must demand payment: sent in notice, must demand payment

Corporation must pay: must pay dissenters the amount corporation estimates as the fair value of the shares plus accrued interest

Notice of dissatisfaction: if shareholder dissatisfied with value, 30 days to send own estimation of value

Court action: corp does not want to pay, corp has to file action in the court within 60 days of receiving shareholder demand, otherwise corp must pay value shareholder requested

Question 110

Voluntary dissolution

Answer 110

Incorporators or directors: shares not issued or business not commenced - majority of incorp or initial directors may dissolve by sending articles of dissolution to state. Pay debts before dissolution, if shares issued, assets remaining to shareholders

Dissolution by corporate act: fundamental change procedure

Question 111

Effect of dissolution

Answer 111

Continues corporate existence but cannot carry on business other than wind up and liquidation

Barring claims against corp: claim can be asserted against dissolved corp, even if claim after dissolution. If after distribution to shareholders, can assert claim against shareholders for pro rata share of claim. Can cut this short by notifying claimants in writing of dissolution - deadline of not less than 120 days to file claim

Question 112

Revocation of voluntary dissolution

Answer 112

corp may revoke using same procedure that was used to approve it

Question 113

Administrative dissolution

Answer 113

state may bring action to dissolve for things like failure to pay fees or penalties, failure to file annual report, failure to maintain registered agent in state. State must give written notice of failure.

Corp does not correct or show grounds do not exist within 60 days: state dissolves by signing certificate of dissolution. Can reapply for reinstatement two years after effective date of dissolution - state reason for dissolution did not exist or has been eliminated

Question 114

Judicial dissolution

Answer 114

Action by attorney general: fraudulent obtaining of articles or corp is exceeding or abusing authority

Action by shareholders:
directors deadlocked in management, and irreparable injury to corp threatened
directors act in way that is illegal, oppressive, or fraudulent
Shareholders deadlocked in voting power and failed to elect one or more directors for at least two consecutive annual meeting dates
Corporate assets are being wasted, misapplied, or diverted for noncorporate purposes
Corp abandoned business and failed to dissolve in reasonable time

Question 115

Action by creditors

Answer 115

creditors may seek it if
creditor’s claims have been reduced to judgment, execution of the judgment has been returned unsatisfied, and corp insolvent
corp has admitted in writing that creditor’s claim is due and corp insolvent

Question 116

Court supervision of voluntary dissolution

Answer 116

court may dissolve corp in action by corp to have its voluntary dissolution continued under court supervision